More to SKS script than meets the eye

NEW DELHI/MUMBAI: It just doesn't add up. This May, the board of directors of SKS Microfinance gave CEO Suresh Gurumani a 50%-plus increment, hiking his annual compensation from Rs 1.5 crore to over Rs 2.3 crore. It also awarded him a Rs 80-lakh cash bonus. Three months after that, Mr Gurumani helped complete a spectacularly successful IPO, the first by a microfinance institution (MFI) in India and the second the world over, fulfilling a key mandate the board had given him when he was hired in December 2008. The stock listed at a market cap of Rs 8,000 crore, exceeding most analyst expectations.

And yet, within two months of what was a landmark listing for India's microfinance sector, the board fired Mr Gurumani.

No official explanation was offered by the company, though CFO Dilli Raj, in a conference call with analysts, ruled out any financial irregularity. Many directors, all speaking on the condition of anonymity, chorus a one-line explanation for the termination—non-performance.

ET interviewed over a dozen sources close to both Mr Akula and Mr Gurumani—investors, directors, current and former employees, bankers and regulators. Sources on Mr Akula's side paint this as a difference in business strategy. Those close to Mr Gurumani say this was a personality clash, a power struggle. They point to Mr Akula's changing roles in the company as evidence.

Mr Akula founded SKS Microfinance in 1998. He demonstrated vision and grit; he had the ability to attract several private investors into the nascent and often-troubled sector—that gave SKS the capital for growth. He turned SKS into the country's largest microfinancier.

But he often had to spend time away from the company, fighting two long-drawn-out personal court cases here and in the US, one in 2004 and one this year.

That prompted him to step down as executive chairman in 2008 to become non-executive chairman. Another reason was that investors led by Sequoia Capital and independent directors felt the company needed a hands-on professional CEO. Mr Gurumani was hired by the board for that role. But only a year later, his court cases resolved, Mr Akula wanted to get back into the thick of things. The board did not entertain this before the IPO. But in September, a month after the IPO, it appointed Mr Akula as the executive chairman. Mr Gurumani was ousted less than a month after that.

All this raises an uncomfortable question: did the board fail to manage the relationship between the founder and the professional CEO? The same question could well resonate across many boardrooms in India Inc.

Trouble began even before IPO

It is fairly common to see entrepreneurial CEOs, in small companies and even in some of India's largest, hold sway over a bunch of independent directors who demonstrate less than the ideal level of independence, objectivity and judgement that is expected of them. But, to be fair, was that the case in SKS?

This board has some illustrious names: Pramod Bhasin, the CEO of Genpact, India's largest BPO outfit; PH Ravikumar, the former managing director and CEO of National Commodities & Derivatives Exchange and now the head of Invent Assets Securitisation & Reconstruction; and Tarun Khanna, a professor at Harvard Business School.

And the board sure tried to diffuse the explosive confrontation between the founder and the CEO—sources say many directors spent a total 50-60 hours trying to negotiate a settlement with Mr Gurumani. Sources close to Mr Akula say the CEO agreed to a settlement, but backed out before signing the deal. Sources close to Mr Gurumani say he reneged because 'extremely onerous conditions' were introduced in the agreement. Still, several pieces of evidence suggest that the founder-CEO relationship could have been managed better.

There is a lot at stake in this battle—egos, reputation, power, and of course, money... lots of it. Consider this: Mr Gurumani is entitled to 675,000 shares under a stock option plan that was to vest gradually over a period till 2014, when his contract was to end. This is worth over Rs 90 crore based on the current share price. Of these, 230,000 shares worth over Rs 30 crore would have vested in early December 2010.

Mr Akula and board members were actively involved in negotiations with Mr Gurumani on exactly how much of these he would get if he resigned voluntarily. But these negotiations became acrimonious and broke down forcing to board to fire the CEO.